Given we will be living in one of the units, we won’t be collecting rent from that unit and as a result, our return is cut dramatically.

I should clear about $5400 a year comes out a 25% cash on cash return.

Maybe there is a memory leak?

As long as you have 2 years of tax returns showing your income you'll be fine.

She is patching and returning everything else to move in condition (why do people have to hang stuff on every wall!!??)

Question: Do I have to return the security deposit back to this Tenant ?

Typically, conventional lenders will not count rental income until you have two tax returns reflecting that income.

So you could start out that way and then maybe not need one.Or you could short sale it, etc.Rehab would be the last ditch effort I would ever consider.Location, condition, etc are all known before you ever buy, so it not like you HAVE to buy it or will get stuck with it.Do your DD, REAL DD, not this electronic nonsense and youll probably be okAnd on $5k, a 15% return is only $750...

He held my hand through the finer details of getting this thing done and asked nothing in return! 

Even assuming someone paid all cash here, it's only about a 3.5% return based on their stated net income!